3 Key Pre-Sale Documents for Selling a Business in Singapore

When selling a business in Singapore, following a structured process is crucial to facilitate a smooth transaction. This established procedure is important as it helps clarify the terms and expectations of the sale, protecting the interests of both parties involved.

During the pre-sale stage, three essential documents are required — each playing a pivotal role in ensuring a fair and transparent process for both the buyer and the seller.

The Non-Disclosure Agreement or NDA is an agreement that protects the use of confidential information exchanged between the parties. The primary purpose of the Non-Disclosure Agreement when selling a business is to ensure that both the disclosing and receiving parties are aware of how confidential information can be used.

A Non-Disclosure Agreement typically covers the following:

• What the receiving party must do after use of the confidential information.
• Timelines which restrict when the confidential information can be used by the receiving party.
• Information on who from the receiving party can view, use and handle the confidential information.
• Remedies that parties are entitled to in the event of a breach.

If you do not sign a Non-Disclosure Agreement, there will be no certainty of what is considered confidential information and the scope of the use of that confidential information. The more confidential information is shared with unconnected persons with the deal, the higher the possibility that the confidential information becomes widespread, potentially leading to a loss of competitive advantage and harm to the original owner’s interests and business operations.

The term sheet is a preliminary document used when selling a business that outlines the fundamental terms and conditions of a proposed transaction between two parties. It acts as a “blueprint” for the deal, providing a concise overview of key aspects such as purchase price, payment terms, representations and warranties, due diligence requirements, and closing conditions.

It is important to note that a term sheet is a non-binding document except for provisions like confidentiality and exclusivity, which must be complied with by all parties concerned. Additionally, term sheets are flexible, so both parties can make adjustments until they reach mutually agreeable terms.

When reviewing a term sheet, you should look for these aspects:

• Valuation: Examine the proposed purchase price and payment terms to ensure they reflect the company’s actual value and potential for future growth.
• Earnouts and Performance Metrics: Approach earnouts and performance-based payments with caution, as they link future payments to potentially uncertain outcomes and add complexity to the deal.
• Synergies: Evaluate whether the potential synergies from the transaction align with your strategic goals, especially if you plan to run the company independently.
• Financial Due Diligence: Conduct thorough due diligence to confirm the accuracy of financial statements and uncover any accounting irregularities.
• Tax Implications: Understand the tax consequences of the deal, including any existing tax liabilities or opportunities for tax optimisation.
• Working Capital Adjustments and Cash Balances: Scrutinise working capital adjustments and cash balances, as they can significantly affect the purchase price. Clarify whether the deal includes or excludes cash on hand.
• Representations and Warranties: Pay attention to representations and warranties, noting that these often expand in the final sale and purchase agreement.
• Indemnity: Ensure clarity around any indemnity clauses that may hold you responsible for post-closing liabilities or legal claims.
• Non-Compete and Non-solicitation Clauses: Be wary of restrictions on competition or solicitation that might limit your operational capabilities or allow the seller to start a competing business nearby.
• Unreasonable One-Sided Terms: Identify any terms that may be unreasonable or overly biased, and don’t hesitate to challenge or question clauses that appear unfair.

The Letter of Intent is a pre-contractual written document setting down a preliminary understanding between parties. It can serve as a standalone document or include the Term Sheet within it, depending on how the documents are structured.

The Letter of Intent provides a framework of what has been agreed upon and, in unsettled issues, can be used for negotiations in the future. This document is commonly used for complex transactions or when the deal has portions which are conditional upon certain acts being done by the seller. It can also be used to record tentative agreements between the parties based on milestones reached during negotiations.

The terms of the Letter of Intent can sometimes be ambiguous, leading to uncertainties about the parties’ original intentions. Although typically non-contractual, if a Letter of Intent includes essential terms, courts in the US and UK may view it as a binding contract.

Therefore, if you are selling your business, you should ensure that terms agreed upon in the Term Sheet are reflected in the Letter of Intent, particularly regarding the good faith deposit, which should be negotiable for refund if the final agreement is not reached. You should also carefully examine any express clauses in the Letter of Intent that indicate its non-binding nature or that negotiations are ongoing.

When buying or selling a business, there is an elaborate process that should be followed. Therefore, it is recommended to engage a specialised lawyer for corporate legal services from trusted corporations like DLLC.

At DLLC, our corporate legal advisors bring years of experience to ensure that every transaction is conducted smoothly and your legal protections are robust. And if disputes should arise, our civil litigation lawyers are also on hand to resolve any civil matters effectively. Contact DLLC today for comprehensive legal support tailored to your needs.